Chapter 11 Money and Banking Section 1:

• Barter economy• economic system where money is not used.• Relies on trade • Hard to value trade items• Hard to divide trade items

Money

• any substance that serves as a medium of exchange

• Measure of value• Store of value• Accepted by society

Medium of exchange

• something accepted by all parties as payment for goods and services– Gold– Silver– Salt• Salarium: annual pay for Roman soldiers = salary

Measure of value

• a common denominator that expresses worth that most people can understand.

• US: price expressed in dollars and cents.

Store of value

• property of a medium that allows purchasing power to be saved until needed

• Goods and services can be converted into money. Some, more than others– Precious metals/minerals– Vintage items (cars, wines, art….)

• Money itself is a store of value

Commodity money

• has an alternative use as an economic good• Compressed tea• Spears• Dog teeth

Alternative forms of Currency• Come up with 10 alternative forms of currency.

– Bottle Caps– Gum– Salt– Gold– Silver– Gasoline– Water– Food– Coffee– Cloths– Shoes– Glasses– Medicine– Wood– Alcohol

Characteristics of Money

• Durability– Must be able to last when handled so that it can last.

• Roman coins that still exist today

• Portability– Easily transferable from one person to another.

• Divisibility – Money should be able to be divided into smaller units so

that you only spend what you need to.• Limited Availability– If the product is too common then it would have no value.

Fiat money

• has a monetary value by government decree.• Metallic coins/paper bills• It has value because we have faith in our

government.– Without this trust in the government the currency

has no value.

specie

• money in the form of coins made from silver or gold.

Monetary unit

• 289 standard unit of currency in a country• US, dollar• Japan, yen• Britain, pound• China, yuan• Europe, Euro-dollar• India, rupee• Russia, rouble

Section 2:

• Monetary standard• the mechanism that keeps the money

supply…..• Portable• Durable• Divisible• In a limited supply

State banks

• banks that received their charter to operate from a state government

• Issued their own currency• Backed by gold/silver• Subject to – Fraud – Counterfeiting

Legal tender

• fiat currency that must be accepted in payment of debts

• Paper issued during the American Civil War– Aka: “greenbacks”

United States Notes

• a new fiat currency issued in 1862• Legal Tender Act• Also called “greenbacks”• No gold or silver backing.

National banks

• privately owned banks that received their charters from the federal government.

• Part of the National Banking System• All banks would be forced to join the NBS after

1865 – US government put a 10% tax on private banks not

in the system.

National bank notes,national currency

• paper currency that was backed by US government bonds

• Uniform appearance• Confidence backed by “rigorous” government

inspections and audits of banks.

Gold certificate

• paper currency backed by gold• Gold deposited in the Federal Treasury• First used in large denominations for banks• Later smaller denominations for public use.

Silver certificate

• 1878 paper currency backed by silver• Political gimmick to help the silver industry• Also put more currency in economy to

stimulate consumption

Treasury coin notes

• paper currency issued by the US Treasury• Redeemable in gold or silver• Ended in 1893

Gold standard

• basic currency was equal to, could be exchanged for, a specific amount of gold.

• 1900 Gold Standard Act• Could be exchanged at the Treasury for gold at

any time.

Inconvertible fiat money standard

• US system since 1934• A monetary standard under which the fiat

money supply cannot be converted into gold or silver by its citizens.

Assessments: Checking for Understanding

• 1 How does money advance the exchange of goods and services?

• Money allows people to buy directly what they need instead of waiting for a “mutual coincidence of wants”– Mutual coincidence of wants allows barter to

happen.

Assessment

• 3 Describe three functions of money.• It serves as a medium of exchange• Measure of value• A store of value

Assessment

• 4 Name four types of early money.• Tea leaves• cheese• Spears• Various commodity money

Assessment• 5 Explain how the dollar was adopted as the basic monetary

unit.• US states printed their own money • Backed by gold/silver

– Worked only for region – national economy was in chaos.

• Federal government needed funds for the revolution and issued paper bills.– Idea was temporarily successful, but inflationary in the long run

• The idea of a national monetary unit was popular, though.– Specie, not paper.

• Name for dollar came from Austria

Assessment

• 6 Identify the four characteristics of money.• Portability• Durability• Divisibility• Limited availability

Assessments: Checking for Understanding

• 1. What is the purpose of a monetary standard?

• To keep the money supply• Portable• Durable• Divisible• In a limited supply

Assessment

• 3 Explain how privately issued bank notes became part of the money supply.

• Before the US Civil War, most of the money was paper currency used by privately owned state-chartered banks.

Assessment

• 4 List the five major currencies in use after the Civil War.

• Greenbacks• National currency• Gold certificates• Silver certificates• Treasury coin notes

Assessment• 5 Identify the advantages and disadvantages of a gold

standard.• Advantages:• Some feel secure if they know money can be converted into

gold• Can prevent the government from printing too much paper

currency• Disadvantages:• Gold stock may not grow fast enough to meet the needs of

the economy• Drain on the government’s gold reserves• The price of gold fluctuates• Political risk of failure.

Assessment

• 6 Describe the inconvertible fiat money standard the United States uses.

• It is a system under which the fiat money supply cannot be converted into gold or silver by its citizens.

Image, p. 288

• How does money function as a medium of exchange?

• It is generally accepted as payment for goods and services.

Image, p. 289

• What characteristics must money have to be a successful medium of exchange?

• Portability• Durability• Divisibility• Limited availability

Image, p. 293

• What part of the Constitution gives Congress the right to coin money?

• Article I, section 8

image, p. 294

• In what order re the quarters being released?• In the order in which the states were admitted

to the Union.

p. 297• 1 Why does the writer believe countries will not accept a

common currency?• The depictions on currency reinforce national icons and

symbols• Countries reluctant to surrender control of the own banking

systems and macroeconomic policy.• 2 Is the writer’s argument valid or not?• For ten years, the Euro has been successful.• At one point, it was worth over USD $1.60.• Presently, due to member nations’ economic failures (Greece,

Ireland, etc.), the Euro has dropped in value of USD $1.30

Quick Write

• Why do you think that Great Britain did not switch over to the Euro in 2002?